Valuations Will Keep Rising, Socio-Economic Disparity Will Increase and Revolt is Imminent
I was talking to a friend of mine today who works at a hedge fund and generally thinks about investing in different ways than I do. I’m pretty bottom-up, and he’s pretty top-down.
We were trying to figure out where interest rates were going (interest rates follow GDP — more consumption means you need more money, which creates more demand for borrowing, etc. Good paper on that here and you can just read the abstract).
And in looking at US public equity markets, you’d probably assume consumption is up. But that’s not true for a few reasons.
(1) Companies aren’t being over valued, they are trading higher because those companies are reporting higher earnings. But those earnings (actual profit) are not being driven by revenue. They are being driven by cost savings. They are being caused by efficiency (aka A LACK OF CONSUMPTION!).
And this is continuing to happen. Technology allows us to be more efficient (Whatsapp, a $19B telecom company was built by 33 engineers). So what happens when there is stagnant, or maybe even less consumption? Lack of GDP growth, and interest rates stay low.
Okay, so if interest rates stay low, what happens next? Two things:
→companies keep borrowing, because it’s cheap. They have crazy amounts of leverage and can grow faster. They’ll borrow money so that they can buy other companies, creating more competition for Private Equity firms (I don’t think this is good for P/E firms that now have more companies in the competitive mix).
→It means people will keep investing in both private and public equity markets for a while. This means valuations aren’t going to come down for some time (good for Venture Capital). Also, if lots of capital is being fueled into equity markets, more new entrepreneurs will have the chance to build companies, which will be massively scalable, creating incredible individual wealth due to how efficiently said companies can be built.
Increased wealth by just a few, and a growing number of the ultra wealthy (I think there will be many more billionaires in the next 10–15 years) will mean that people start saving more quickly than they will begin spending. They will also be investing, which doesn’t count as consumption. (Give someone $1B, and they won’t spend $1B, they’ll save and invest most of it. Investing is better than savings, but doesn’t lead to automatic increase in consumption).
And people are more scalable now — technology enables one individual to perform much more work, and a greater % of all the work we need done. This will push unemployment higher, and help the rich get richer.
It begs the question: is a 0% unemployment rate still desirable? We once thought technology would make our lives so good, we wouldn’t even have to work! Yet now, everyone is complaining about the fact that there is no work to be had.
What if there becomes a segment of the population that doesn’t need to work, and just gets paid by the gov’t a living stipend. Would that be bad?
It would require tax hikes on the super wealthy, that won’t get passed in Congress in the near term.
You might be saying: “the ultra-wealthy should get to keep their money for all the work they did!” Sure, I agree, but a tax hike on them would feel more like paying a monthly bill to avoid an uprising. If 20% of the population is out of work, poor, desperate and with nothing to do, revolt is imminent.
I kinda rambled here, but in short, consumption will probably keep decreasing. Things are cheaper now, we have more access, and capital will continue to be pooled in to a smaller set of hands.
This means interest rates will stay low, funneling capital into equity markets, which will help more entrepreneurs build businesses, take out cheap credit to build them, etc etc and building on the cycle.
Eventually, socio-economic disparity will become too much, people will get angry, people will be out of jobs. They will want to fight.
The government has a variety of options:
(1) Force more consumption to give all of those people work. They can do this by increasing taxes, and then spending all of that money
(2) Print more money, borrow, and then pay people to do stuff. But this is unsustainable
(3) Do nothing, and be overthrown by a revolt
(4) Incentivize the ultra-wealthy to spend and increase consumption
(5) Decide 0% unemployment is not actually desirable, and technology has created a utopia where we don’t need to work (but then what’s the purpose of living)
I dunno, my head is spinning and I’m nervous and I think we’re totally screwed. Or maybe we’re not.